The Electricity Situation in Nigeria

Bowing Out

It is not a secret that I spent most of my entrepreneurial life within Nigeria at the front end of the electricity industry. However, Nigeria’s power problems are complex. The solutions appear simple to me; but re-engineering our “system” to address the solutions is where most of the problems lie.

I am not an economist, energy sector consultant or public policy expert. I’m barely a techie but I have been a service provider for the electricity industry since 2009. Everything you’re about to read is backed by experience not deep empirical research — so feel free to take it with a pinch of salt. These are my thoughts after speaking to everyday customers like you and me over many years.

Before I continue, I’d like to say this: Saudi Arabia has a population of approximately 33 Million people. It currently generates over 70,000MW. In 2013, a plan was unveiled to grow this output to 156,000MW by 2040, with steps being taken to install 5GW capacity and distribution infrastructure each year through 2020. Saudi Aramco and the Saudi government have been aggressive in trying to meet this target.

This is what Nigeria must do. The government must set yearly milestones and update the public frequently with progress reports.

The electricity industry is broken down into the following sectors:

1. Gas production & supply

2. Electricity generation

3. Electricity transmission

4. Electricity distribution

a. The role of NERC

b. The role of collection companies

I’ll try to proffer solutions for each sector and show how these solutions are interlinked and will ultimately improve the power situation in Nigeria.

Gas Production & Supply:

Nigeria has significant natural gas reserves, estimated at 192 trillion cubic feet and currently ranks ninth in the world. So technically, power generation should not be our problem.

With militancy largely quelled in Nigeria and with the country experiencing increased pipeline security — now is the time for relevant policies geared towards production and supply.

The government should be building pipelines or stimulating the private sector to build gas pipelines which would terminate at every transmission site in every state. Ideally, there should be a gas pipeline terminal within 1km of a transmission facility in each state at the confluence where transmission feeds into the distribution network.

This would enable clusters of generation sites to be located around gas terminals in each state. And electricity generated can be evacuated easily through the transmission and the distribution networks.

With easy access to gas and easy evacuation of generated capacity, the government could then provide incentives for private organisations to install power plants in any of the evacuation sites in any of the 36 states of the Federation.

Electricity Generation:

Nigeria also loses about 16% of power generated during transmission to distribution companies. In essence, roughly 4300MW gets to distribution companies who have to service about 180 million people (this information is important because I will reference it later).

A 1,000MW power plant currently costs about $750M with financing costs, installation, operations and maintenance bringing it closer to $1BN. This equates to about $1Million (N360M) per MW of power. This is a huge cost and not too many companies can raise this type of funds. It will certainly have to come in the form of foreign investment and currently, Nigeria’s power sector is simply not bankable in its current form.

However, there are numerous companies such as oil and gas (upstream and downstream), banks and other financial service institutions, telecoms and associated service providers of the aforementioned industries who can afford to deploy 1–10MW power plants each, for each operational year if given the right tax/other incentives. The time taken to deploy a 1MW plant, and the expertise needed to operate and maintain it is minimal compared to a 1,000MW plant.

Democratizing this segment and letting anyone with 400million naira jump into the power industry seems more logical than the industry permanently struggling to raise the funds for a single 1,000MW plant.

Imagine if 400 companies, and perhaps another 200 high net-worth individuals with the right tax incentives, are able to deploy 1–10MW plants every 18 months!

Electricity Transmission:

Our transmission infrastructure is primarily the responsibility of the government. In other climes, and I am sure the same applies in Nigeria, transmission infrastructure is of national security interest and therefore cannot be fully liberalized by the government for private management.

However, like the pipeline deployment suggested earlier, transmission can be financed by the government by issuing government bonds backed by federal (read oil) revenue.

Our transmission infrastructure needs a complete overhaul and continuous maintenance. We also need to receive updates on how this is being managed, the project’s budget and what the key performance indices (KPI’s) of the transmission company of Nigeria is meant to accomplish on a yearly, if not quarterly basis.

We also need an oversight committee in place (separate from TCN management) ensuring that this information is adequately disseminated and sanctions are meted out for non-performance.

This oversight committee cannot consist of any current/previous employee of NEPA, PHCN, NERC, TCN or any other body affiliated with the electricity sector in Nigeria.

Electricity Distribution:

The electricity distribution companies bear the brunt of the angst about the industry from Nigerians. The thing is, not everyone is privy to understand the constraints they face.

I will try to be balanced and give my perspective on how the industry has failed them and how they in turn have failed the industry and their customers.

Let’s start from the beginning. Save for one or two discos (distribution companies), most of the distribution companies were sold to friends of the government of the day. They weren’t sold to power companies or consortiums with technical partners who were co-investors. And frankly you can’t blame anyone — if an industry has never existed in the private sector before, it is impossible to manufacture the human capital and expertise from thin air. Some may argue that they could have sold them to more capable managers, technocrats and administrators. That is debatable.

What I do know was wrong was that government asked a purchase price for a dud asset. Distribution assets were, and still are, in a terrible state. The companies had no brand equity amongst customers and the government selling you the company for a price was and still is your biggest debtor.

Many ministries, government buildings and military installations still owe the distribution companies a HUGE amount of money – money which could instantly change their fortunes and improve the services they render to Nigerians.

Hard knock life at the disco

Back to the crux of the matter — price regulated companies rarely make a tidy profit.

This is the same the world over. Even the oil industry where tax on profits (another indirect form of price capping) is 85%, the management and shareholders of these oil firms bloat the cost of business and leave a (relative) pittance to the government to tax. That is the only way they can “retain their earnings”. But I digress…..

When the price you can charge users of your services is capped, your profits are capped and your ability to fund your business from retained earnings is limited. If you can’t reinvest, you can’t satisfy your customers.

Investors are not usually keen on price-regulated industries even in the West, not to mention a market like Nigeria which is considered volatile. This is business fundamentals.

So what is the value chain in the distribution industry, you may ask? Well discos, take power from the generating companies (gencos) as described above via the infrastructure of the (Sole) Transmission Company of Nigeria, TCN. This electricity is then distributed via the discos’ infrastructure to the homes of their customers.

Remember when I mentioned that the industry suffers transmission losses of 16% between the genco and the disco? Well the disco suffers an additional loss of up to 12% within its distribution infrastructure. So collectively, Nigeria receives only 72% of the electricity generated by the generating companies. That is approximately 3,700MW for 180M people.

The distribution companies are faced with the arduous tasks of rationing this electricity to everyone.

Typical decisions they have to make on monthly basis include:

a) Should we give electricity to businesses so they remain productive?

b) Should we give less electricity to highbrow areas (because they will pay their bill anyway and they can afford to run a generator)?

c) Should we give to low income areas because they are most vulnerable?

These, as you can imagine, are critical decisions they make for which they get absolutely no thanks.

In addition they are the most scrutinized by the regulators and the most criticized by the country. The problems of the distributors started from the onset, from the moment they acquired the assets and paid an average of $100M dollars.

There are three classes, scratch that, four classes of Nigerian electricity customers:

1. Postpaid customers

2. Prepaid customers

3. Estimated bill customers

4. And of course, thieving customers.

The metering gap in Nigeria is due to the proportion of Nigerian customers consuming electricity without being properly metered or not being metered at all. Estimated bill customers are not metered, but are known to the discos — therefore they are given an estimated bill based on what they have consumed.

Thieving customers are not metered, but are consuming electricity by connecting directly to the grid and thus, unknown to the disco. Thieving customers also fall into the category of being metered, but are bypassing their meters and consuming electricity directly from the grid. It takes a while for the disco to discover them, if at all they do.

So in addition to transmission and distribution losses, discos are also faced with electricity bypass customers and unmetered customers. As a result of all this, discos are only able to collect payment on an average of 42% of the total electricity reaching customers’ homes.

Remember when I said earlier that it is totally unreasonable to expect that the discos will be able to earn enough money to reinvest in the business? Reinvestment in the business would have led to periodical customer enumeration, metering, and upgrade of distribution infrastructure.

NERC: Hero or Villain

The discos are regulated by a body that seems overly protective of the consumer. And in some instances, spiteful towards the discos.

For example, do you know that electricity theft is considered a misdemeanor? Think about it. If you walked into a bank and stole money meant for other customers you will be jailed faster than you can spell jailbird. But do the same for electricity and it is almost considered permissible, especially when you make a case for the disco’s non-performance.

To change consumer attitudes, the regulatory body and lawmakers need to put in place stiff penalties, including long jail terms, for anybody who steals electricity.

Another issue that affects the distribution companies is metering. Again this is a case of doing the same thing over and over and over again, and expecting different results. Discos cannot afford to meter. That is clear. Metering companies are operating in an unbankable industry at the moment so they can’t give the discos equipment financing. Even if they did, at a 28% combined electricity loss and 42% on average collections, they would soon go bankrupt because the discos would not earn enough to allow them recoup their investments in a short period of time.

A great solution would be to liberalize metering and let the consumer simply purchase a meter the same way they purchase a phone and SIM card from the telecom companies.

A whole new industry with employment opportunities will be created. I envision a hybrid Telecoms and PayTV model. You buy a meter from a certified meter shop and you get a certified meter technician to install it. The regulatory body would have instituted technical frameworks to guide the features of the meter etc. and the discos would incentivize meter companies and retailers to formalize their business by having the meters and installers readily available.

Once such a model is in place, the growth for prepaid metering will happen and the disco will begin to see more collection efficiency.

An alternative would be to franchise disco feeders to Super Collectors. Such a collector would invest in metering and will prepay the disco a certain benchmarked sum that is greater than what the disco currently earns from the feeder.

For example, a disco may only be achieving 40% collections from a feeder giving electricity to Ibeju in Lagos. A super franchisee will pay the disco a total of 50% of the collections and then embark on a metering campaign. The disco may give the super franchisee a moratorium wherein he pays 50% of total collections for a period of six months while he recoups his metering expense. Upon metering, the franchisee can expect to see up to 60% collections. That way he makes a 10% margin. Upon completion of metering, the disco can begin to charge him an upfront of 75% of energy distributed to the feeder, while it is expected he will attempt to collect 100% of the funds in order to make a tidy profit. It is expected that having metered 100% of the feeders with prepaid meters, he should be able to recoup up to 95% minimum. With that margin he can incentivize sub-collection companies with a decent percentage, encouraging them to put convenient payment technologies and physical locations in place for the convenience of the paying customer.

Currently, collection efficiency is mostly hampered because discos are only able to pay a little portion of their earnings to collection companies because they simply earn too little.

On average, distribution companies pay about 2.75% of their earnings to collection companies. These collection companies in turn have staff and agents who they pay a proportion of these funds received. In a bid to earn money at a lower operating cost, these collections companies concentrate their efforts in locations with already high collection efficiency. Thus not adding any real value to the disco. However, making them concentrate on areas where the disco is experiencing collection losses will simply put them out of business because the commissions they earn cannot finance the collections infrastructure they need to put in place.

The flipside of this is that when a customer cannot find a convenient place to make a payment, they typically bypass the meter and connect directly to the distribution pole. This is illegal and the punishment is too little, while the cost of discovery (physical checks on the poles and lines) is too high.

This combination of factors makes it easy for customers to do the wrong thing. After all the punishment is light and the disco may not discover their wrong doing for a long time.

Key Takeaways

In summary:

Changing the financing methodology in the Nigerian electricity value chain may take a while but it is doable.

If government should make some policy amendments and develop infrastructure to encourage liquidity in the value chain, the dream of constant electricity can be realized. Those steps are summarized as:

1. Gas infrastructure should be a priority for the Power Ministry. They need to influence NNPC and work together to ensure there is a gas terminal in every state and in close proximity to the transmission infrastructure terminating in that state.

3. NERC should do away with the rigid policy that says customers should not procure their meter.

4. NERC and the discos should provide a framework for meter standardization and let free market forces drive demand and supply. If the two points above are not implemented, we may never see a reduction in the metering gap.

5. State governments should be given more leverage to work with the distribution companies. This way they can influence the local economy of the state to drive the state’s goals for power generation.

If a state is able to support these policies and thus deliver constant power to its citizens, it will see an upsurge of industrialization in its territory. It will also enable increased migration into the state which will in turn produce healthy tax revenues.

Lagos State government and Edo State government have similar programs like this in place and it will be a great thing to see other states follow suit.

Have any additional thoughts, suggestions or comments on the electricity situation in Nigeria? Share in the comments below.

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